North Carolina could serve as a litmus test for the next big wave of bank consolidation.
The state, which has lost more than 40% of its local banks in the past decade, could be viewed as a microcosm for M&A nationwide. Many initial sellers were smaller banks that had financial issues or had hit a wall in terms of growth potential.
Recently, healthier banks have been selling, helping create a new class of big community banks in the state.
Consolidation will continue in North Carolina, industry experts said. What remains unclear is the pace of that consolidation and the role that the state's larger banks will play. Some believe the biggest banks in the state could merge with each other, while others have asserted that an outside bank could move in.
"North Carolina definitely has had proportionately more consolidation than the [overall banking] industry," said Josh Siegel, chairman and chief executive at StoneCastle Partners. "If I were a betting man, I would think we'd still see some more M&A activity" in North Carolina, which has a number of "forward-thinking banks."
The state, which had 109 banks in mid-2006, has 64 now. Since early 2010, nearly 40 banks across North Carolina have agreed to sell themselves, based on data from Keefe, Bruyette & Woods and S&P Global Market Intelligence.
As a result, three state-chartered banks — BNC Bancorp, Capital Bank Financial and Yadkin Financial — are on pace to have $6 billion to $10 billion in assets by the end of this year. A fourth bank, Park Sterling, has managed to get to $3.2 billion in assets.
The $5.7 billion-asset BNC, for instance, has scooped up six North Carolina banks since early 2010, including its pending purchase of High Point Bank, in moves that have added more than $2.2 billion in assets. The company has also completed acquisitions in neighboring states.
Rick Callicutt, BNC's president and chief executive, said he thinks the pace of consolidation in the state has to slow down since so many smaller institutions have already been sold. "I don't see as many potential transactions in North Carolina in the coming year," he said.
There will likely be more potential for deals in states such as South Carolina and Virginia, Callicutt said, adding that North Carolina may also have fewer interested acquirers right now.
There is data to explain why potential buyers could be hesitant to do deals in North Carolina. Banks sold in the last 18 months have been able to negotiate better premiums. The average price to tangible book value over that period was 164%; deals announced from 2010 to 2013 were discounted compared to the seller's tangible book value.
Improved pricing could be a function of sellers' overall health and size; the average community bank sold in North Carolina since early 2015 had $1.3 billion in assets, or more than twice the average size of a bank sold in the five previous years. Credit metrics have also improved.
Other bankers believe more deals will happen, though they will likely involve larger sellers and bigger valuations.
"Consolidation has been something that's been occurring, and I'd say it is likely going to continue to occur," said Scott Custer, the president and CEO of Yadkin Financial, which has bought six banks in the state since 2010, packing on nearly $7 billion in assets.
"We have a number of banks that are comparable in size, and I think it makes sense for those companies — if there are redundancies or maybe an oversupply — to merge," Custer added.
Custer would not say whether Yadkin would be a seller, though a recent report claimed that the $7.4 billion-asset company had hired an investment bank to help it explore its options.
It might make sense for a merger to take place between Capital, Yadkin or BNC, industry observers have said. Then again, a large outside bank, such as Bank of the Ozarks in Little Rock, Ark., South State in Columbia, S.C., or United Community Banks in Blairsville, Ga., could have an interest in bulking up. South State bought a small North Carolina bank in 2007, while Bank of the Ozarks acquired Bank of the Carolinas last year.
BNC, Capital and Yadkin all have private equity investors, which could also influence if and when each of the banks decides to sell.
Complications could include higher prices and settling on a post-merger leadership structure, industry observers have said. BNC and Capital also have pending acquisitions that they might want to integrate first.
Overall, there will be implications for North Carolina bank customers that will be based on how the next wave of consolidation plays out, industry experts have said.
Some big changes have already taken place. Guilford County, for instance, will only have one locally run bank by the end of the year: the $367 million-asset Bank of Oak Ridge. Three other banks in the county — Premier Commercial Bank, NewBridge Bancorp and High Point Bank — have agreed to sell themselves in the last two years.
"If it's smaller banks that are acquired by the larger banks, then the customers have access to more products and services," said Rowe Campbell, chief deputy commissioner at the Office of the Commissioner of North Carolina. "On the other side … they may have less choices of where to bank."